Tag: Hedge Funds

The world of finance isn’t done yet with its effort to turn artistic masterpieces into tradeable securities. A decade ago it was hedge funds and bankers selling small shares in works by Andy Warhol and his ilk as investment opportunities. Today it's the cryptocurrency crowd.

If history’s a guide, the risk and cost of owning a tiny part of an illiquid, hard-to-value asset still outweighs the rewards. And all that without ever getting to hang the picture on your wall.

The new tilt at art trading is as much a throwback to pre-crisis financial engineering as it is about crypto-futurism. A British gallery is promising to sell up to 49 percent of Warhol’s 14 Small Electric Chairs in a blockchain-powered online auction. Buyers can pay in Bitcoin, Ether or other tokens. They’ll take cash too if you’re that way inclined.

How To Sell It

Cryptocurrency prices have been hit by a speculative unraveling and a regulatory crackdown

Source: Bloomberg

These micro-stakes would then be traded on a marketplace. There may be a blockchain verifying transactions, and crypto-currencies changing hands, but we've seen art investment pools and art stock markets before. They don't always end well.

Despite all the airy talk about democratizing art ownership and disrupting the gilded world of auction houses and dealers, this doesn’t really do that. Nobody owning a piece of the Warhol will take it home. It's locked up in a tax-free zone somewhere. What’s being traded is a stake in the special purpose vehicle that holds it.

Bank Canvas

A ranking of the world's most valuable artworks, as of Nov. 17, 2017

Source: World Economic Forum

This may be a wonderful way for the ultimate owner to make money from an artwork without taking it out of storage or ceding control, but it's hardly the Barnes Foundation.

As for the idea that this is a clever bet on the future value of a piece of art, these assets are as risky as any others. The art market is illiquid and can be volatile. Blue-chip artists are no protection against a market crash. Even Warhols were sold at a loss during the financial crisis. Do punters know the difference between this “Electric chairs” canvas, which the gallery says has been valued at 4.2 million pounds ($5.6 million), and others by the same artist?

Artistic Temperament

Global art market sales growth tends to fluctuate

Source: UBS/Art Basel

Imagine what the combined volatility of cryptocurrency markets and the art market might create in times of stress. Liquidity would evaporate. That initial buy-in fee of 2 percent wouldn’t seem so cheap then.

Warhol himself might have enjoyed the idea of trading and owning pieces of art that you've never seen. And there is at least one tangible thing on offer: The people running the auction say buyers can choose to receive a special scanned print of the work in question, which to the naked eye looks just as good as the original. As David Bowie once sang in a song about Warhol: “Can't tell them apart at all.”

If people do manage to make money from this, then finance truly will have reached its post-modern apotheosis.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Bitcoin’s terrible start to 2018 is highlighting the appeal of cryptocurrency hedge funds that make money in both bull and bear markets.

Funds specializing in virtual currency market making and arbitrage strategies delivered first-quarter gains even as their mostly bullish peers lost 40 percent on average. That’s a big reversal from last year, when digital assets soared and market-making funds lagged far behind their long-biased counterparts.

Pivot Digital Trading-2, managed by Hong Kong-based Amber AI Group, generated some of the biggest gains among cryptocurrency funds that avoid directional bets. It rose 4.3 percent in March to bring its first-quarter return to 30 percent, according to the firm. Market Neutral Liquidity SP-Institutional, domiciled in the Cayman Islands, earned 5.6 percent in the first quarter, said Cedric Jeanson of BitSpread Group, investment adviser to the portfolio.

The results suggest some managers are finding ways to profit from wild swings in cryptocurrencies without having to predict whether the coins will rise or fall. Such tactics may appeal to investors who want exposure to digital assets without their extreme volatility.

As a group, cryptocurrency hedge funds are still highly correlated to the market. A Eurekahedge index for the category posted its biggest three-month slump on record last quarter as Bitcoin sank more than 50 percent. The index soared 1,709 percent in 2017, when Bitcoin jumped about 1,400 percent.

Among funds that lost money was Silver 8 Partners. It dropped 25 percent in March and 32 percent in the first quarter, according to a commentary sent to investors. Silver 8 invests in digital assets, along with fintech, blockchain and machine learning companies.

"High levels of uncertainty and low market liquidity make investments in blockchain-related assets volatile," the firm said in a newsletter. "They tend to overreact to cycles of euphoria and pessimism, where the market price itself acts as a catalyst for further momentum."

The fund has made more than 1,000 percent for investors since its inception in 2016, including a more than 750 percent gain in 2017.

While funds from Amber AI and BitSpread tend to not post such high returns during boom times, they provide investors with some protection when prices of digital assets fall.

Weathering Turmoil

PDT2, as the Amber AI fund is otherwise known, trades the 25 largest digital currencies on exchanges including Huobi, OKEX, Bitfinex, Binance, Kraken and BitStamp, said Tiantian Kullander, one of the four former Morgan Stanley traders who started the firm with a one-time programmer at Bloomberg LP, the parent of Bloomberg News.

The fund began trading early this year and oversees about $25 million, said Kullander. Its quantitative trading strategies include market-making, short-term trend following and exploiting pricing discrepancies between different currency pairs and exchanges.

Market Neutral Liquidity SP-Institutional, with more than $100 million of assets under management, makes markets for currencies such as Bitcoin, Ethereum and Ripple, BitSpread’s Jeanson said.

Bitcoin’s recent wobbles have given fresh urgency to a question that’s gripped market observers for much of the past year: Will the cryptocurrency go down as one of history’s most infamous bubbles, alongside tulipmania and the dot-com craze?

The magnitude of Bitcoin’s boom (before it lost as much as 50 percent from its Dec. 18 high) suggests investors have reason to be worried.

As the chart shows, the cryptocurrency’s nearly 60-fold increase during the past three years was truly extraordinary.

It dwarfed the Nasdaq Composite Index’s gain during the headiest days of the 1990s. Going further back, it comfortably outstripped the Mississippi and South Sea bubbles of the 1700s. It even topped the Dutch tulipmania of the 1630s, though that last comparison should be taken with a grain of salt given the scarcity of recorded tulip values. (The chart includes prices for just one varietal; consistent post-peak figures were unavailable.)

Bulls say that Bitcoin’s boom is far from over, and that there’s more to analyzing a market than just measuring price gains. While the recent tumble has alarmed some investors, the cryptocurrency has bounced back from several previous swoons exceeding 50 percent. If Bitcoin did become a widely-accepted form of digital gold, as predicted by Cameron Winklevoss of Facebook fame, it could have a lot further to surge.

There’s also more than one way to slice a rally. On an annualized basis, Bitcoin’s three-year rise has been slower than the gains seen during several of history’s biggest manias — most notably the Mississippi and South Sea bubbles.

Still, skeptics abound. Howard Wang of New York-based Convoy Investments LLC and Jeremy Grantham of GMO LLC have analyzed Bitcoin’s advance relative to past frenzies and concluded that it’s unsustainable. Grantham, who helps oversee about $74 billion as GMO’s chief investment strategist, summed up his concerns in a Jan. 3 letter to investors:

“Having no clear fundamental value and largely unregulated markets, coupled with a storyline conducive to delusions of grandeur, makes this more than anything we can find in the history books the very essence of a bubble,” he wrote.

The strategist has a mixed record of success with such warnings. While Grantham was correct to call the 1990s surge in tech stocks a bubble, he exited too soon and missed out of some of the market’s biggest gains.

Only time will tell whether Grantham and other bears are right, wrong, or just too early when it comes to Bitcoin.

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For a menu of cryptocurrencies on Bloomberg: VCCYFor bitcoin prices: XBT Curncy

The prepared intro of bitcoin futures agreements at CME Group Inc., Cboe Global Markets Inc. and Nasdaq Inc.&#xA 0; will make it a lot easier to bank on a decrease. Hedge funds, which have actually mostly remained on the sidelines, are waiting on the Chicago Mercantile Exchange &#x 2019; s futures market to open for a fresh chance to wager versus the cryptocurrency, inning accordance with more than a half lots individuals trading the possessions.

&#x 201C; The futures lower the frictions of going short more than they do of going long,&#xA 0; so it &#x 2019; s most likely net bearish, &#x 201D; stated Craig Pirrong, a service teacher at the University of Houston. &#x 201C; Having this instrument that makes it much easier to brief may keep the bitcoin rate a little closer to truth. &#x 201D;

Bitcoin has actually acquired countless percent considering that it began selling 2010. A financial investment of $1 at the start would now be valued at more than $1.4 million. A dollar purchased the S&P 500 stock index for the very same duration would now deserve less than $4 consisting of reinvested dividends.&#xA 0;

Some see the bitcoin market as &#x 201C; among the best shorting chances ever, &#x 201D; stated Lou Kerner, a partner at Flight VC who purchases the cryptocurrency. &#x 201C; You have a great deal of zealotry, and a great deal of individuals, including me, who believe it &#x 2019; s the best thing to ever occur in the history of humanity. You have a great deal of individuals who believe it &#x 2019; s a bubble and a Ponzi plan. It turns out both of them can &#x 2019; t be. &#x 201D;

Bitcoin has actually been particularly unstable just recently, plunging almost 20 percent in less than 90 minutes on Nov. 29, to $9,009 after briefly topping $11,000. The cost has actually because recuperated, and was trading at more than $11,332.01 at 11:42 a.m. in New York on Monday, a 3.9 percent dive because Friday.

Cboe stated Monday it will begin trading bitcoin futures on Dec. 10, while CME &#x 2019; s agreements are set to debut on Dec. 18.&#xA 0; Nasdaq is preparing to use futures in 2018, inning accordance with an individual knowledgeable about the matter. Cantor Fitzgerald LP &#x 2019; s Cantor Exchange is developing a bitcoin derivative, and start-up LedgerX currently provides choices.

Ari Paul, co-founder of hedge fund BlockTower Capital and previous portfolio supervisor at the University of Chicago endowment, stated&#xA 0; individuals are misinterpreted if they believe the notoriously unpredictable cryptocurrency is a precise brief.

&#x 201C; While some traders aspire to be able to brief bitcoin and will do so when the futures are introduced, there is a far higher quantity of loan excitedly waiting for the futures as a lorry to go long, &#x 201D; Paul stated.

&#x 2018; Small Potatoes &#x 2019;

There are restricted methods to brief bitcoin today, stated Michael Moro, president of Genesis Global Trading. The cryptocurrency trading platform has actually provided about $20 million to financiers to take bearish positions, which were primarily to hedge existing bets, he stated. Business like GDAX, BitMEX and Bitfinex permit financiers to purchase properties on margin for brief durations.

&#x 201C; With the existing exchanges, nobody can get in and brief $1 million, &#x 201D; Moro stated. &#x 201C; It &#x 2019; s truly little potatoes on exactly what you can do today. The CME people open a brand-new frontier. &#x 201D;

The capability to short the currency is &#x 201C; a vital part of the environment, &#x 201D; stated Novogratz, who just recently started to raise $500 million to purchase cryptocurrencies. Novogratz, a bitcoin follower in the long term, has actually stated brief trades can be dangerous.

&#x 201C; There is a great deal of froth, &#x 201D; he stated at a cryptocurrency conference recently in New York. &#x 201C; This is going to be the most significant bubble of our life times. &#x 201D;

Short sellers basically obtain a security, wagering that the rate will fall and they can pocket the distinction when they return the holding. The technique brings dangers. Loaning bitcoin can be hard, and cost swings abrupt, stated Moro of Genesis.

&#x 201C; The principle is that this is such an unpredictable market that it &#x 2019; s going to terrify a great deal of financiers away, &#x 201D; stated Kerner of&#xA 0; Flight VC.

Investors might get stung like those who wager versus the web bubble in the late 1990s, stated Aaron Brown, a previous handling director at AQR Capital Management who purchases the cryptocurrency.

&#x 201C; People who shorted the web in 1998 were right, however they went broke prior to they might gather any jackpots, &#x 201D; Brown stated. &#x 201C; One of the issues with it, if you think it &#x 2019; s a bubble or a Ponzi plan or whatever, it can go on for a very long time. &#x 201D;

The world &#x 2019; s biggest exchange owner reversed course today and stated it prepares to present bitcoin futures by the end of the year, just a month after dismissing such a strategy. The biggest cryptocurrency, which has actually risen more than sixfold this year, reached a record high after the statement.

CME &#x 2019; s next-door neighbor throughout the street in Chicago appears to have had a lot to do with the choice. Cboe Global Markets Inc. stated previously this year that it was going to start a bitcoin futures agreement by year-end or early 2018, and waits for approval from the Commodity Futures Trading Commission. The CME agreement will settle in money and utilize an everyday rate from the CME CF Bitcoin Reference Rate, which is supported by digital exchanges Bitstamp, GDAX, itBit and Kraken. Missing out on from that list is Gemini, among the other big worldwide exchanges, which struck a handle Cboe.

An operating derivatives market might assist expert traders and financiers access the extraordinary volatility intrinsic in bitcoin without needing to trade on unknown locations that might run the risk of anti-money laundering and know-your-customer guidelines.&#xA 0; It will likewise enable traders to hedge their money positions in the digital currency, which to this day has actually been challenging to do.

“”As the world &#x 2019; s biggest controlled FX market, CME Group is the natural house for this brand-new automobile that will supply financiers with openness, rate discovery and threat transfer abilities,” “Terrence Duffy, CME &#x 2019; s ceo, stated in a declaration today.

The production of bitcoin futures is an essential action in opening the property to institutional financiers, who presently have couple of chances, stated Spencer Bogart, head of research study at Blockchain Capital, a San Francisco-based equity capital company. Bitcoin Investment Trust, presently among the only opportunities for financiers looking for bitcoin-backed securities, is trading at a premium of more than 30 percent above net property worth. The trust, called GBTC, is a &#x 201C; physical &#x 201D; fund, indicating it holds bitcoin itself.

&#x 201C; The quantity of institutional cash in bitcoin now is hardly any since there are few automobiles, &#x 201D; Bogart stated. &#x 201C; If there are bitcoin futures, there can be futures-based &#x 201D; exchange-traded funds.

In the race for bitcoin derivatives, both CME and Cboe have actually lost to a start-up. LedgerX won CFTC approval to use swaps and choices on bitcoin and started trading previously this month. Volumes have actually been light up until now. The other day, 103 bitcoin swaps traded on LedgerX, while 9 choices agreements altered hands, inning accordance with the exchange. The LedgerX alternatives trades are physically-delivered, offering financiers who hold an agreement to maturity the capability to own bitcoin outright.

Ari Paul, a co-founder of Blocktower Capital, stated LedgerX is beginning gradually on function. “”DRW is a market maker there,” “Paul stated. “”There &#x 2019; s quite low volume. A million dollars a day. I do anticipate them to have a great deal of volume soon. They are smartly increase.””

Many financiers who wish to can &#x 2019; t keep ownership of bitcoin now, what &#x 2019; s called custody, &#x 201C; either for regulative factors or since it &#x 2019; s difficult and frightening,” “Paul stated. In a regulated market like futures that #x &doesn 2019; t end up being a problem. “”The capability to quickly brief enables market neutral methods and makes high-frequency trading a lot easier. That draws a great deal of attention from hedge funds and the standard financing world.””

CME and Cboe deal with obstacles to win over financiers to their bitcoin futures. If the underlying rates is unsound that might guide individuals away, stated Mark Williams, a financing speaker at Boston University &#x 2019; s Questrom School of Business.

“”The issue is that CME will try to deal with bitcoin like a corn or wheat future when this product remains in an extremely dangerous class of its own,” “Williams stated. “”One of the significant areas to offer and purchase bitcoin are through uncontrolled container store exchanges situated beyond the reach of U.S. regulators.” “He kept in mind that given that 2009, practically half of these kinds of exchanges consisted of Mt. Gox, as soon as the world &#x 2019; s biggest bitcoin market, have actually failed.”&#xA 0;” CME has no other product future that appears like or acts like bitcoin.&#xA 0; To me this suggests problem.””&#xA 0;

Jon West, head trader at digital possession brokerage Omega One, stated the quantity of day-to-day margin CME and Cboe need will be an essential active ingredient. If it &#x 2019; s expensive “”then it &#x 2019; s not extremely beneficial for hedging since you have to have a lot cash in your account,” “he stated. CME ought to take it slow as it develops its agreement, he stated. “”It &#x 2019; s a really complicated property with a lot going on.”

The development of bitcoin futures ought to make it much easier to produce an exchange-traded fund based upon the digital possession. So far that &#x 2019; s been a much more difficult job. The United States Securities and Exchange Commission in March turned down a bitcoin ETF proposed by Tyler and Cameron Winklevoss– the co-creators of the Gemini exchange– stating essential surveillance-sharing contracts were too challenging considered that &#x 201C; substantial markets for bitcoin are uncontrolled, &#x 201D; inning accordance with the company.

CME is a giant in trading with items consisting of futures on the S&P 500, oil and gold, and consumer connections all around the world. The timing of the choice is a little bit of a surprise. Simply a month earlier, CME President Bryan Durkin stated on Bloomberg Television that &#x 201C; I actually #x &put on 2019; t see us moving forward with a futures agreement in the extremely future. &#x 201D;

Under Duffy &#x 2019; s management it has actually drawn back from organisation interests that #x &didn 2019; t line up with its historical function as a futures powerhouse, such as closing down its European operations and leaving credit-default swap cleaning. Its resistance to bitcoin futures was viewed as lined up with Duffy &#x 2019; s vision of keeping the business &#x 2019; s concentrate on exactly what it has actually constantly succeeded.

“”I &#x 2019; m a little worried about that both of those futures agreements are money settled, &#x 201D; stated Garrett See, president of DV Chain, a sis business of trading company DV Trading, which trades cryptocurrencies. The Cboe agreement will be settled utilizing auctions on the Gemini exchange. See stated there has actually not been a great deal of volume in those auctions, so he raised the concern of exactly what occurs if an auction stops working, or there &#x 2019; s inadequate volume to keep it from being controlled.

&#x 201C; I &#x 2019; m actually delighted to see derivatives enter the area, &#x 201D; See stated. &#x 201C; I see it as a fantastic action, however in a perfect world I &#x 2019;d truly prefer to see physical shipment &#x 201D; in futures.

Another advantage is the improved policy that will include bitcoin futures, Omega One &#x 2019; s West stated. “”Futures trading must prevent some black market company and press it into more regulated locations,” “he stated.

The arrogant macro supervisor who flamed out at Fortress Investment Group LLC is beginning a $500 million hedge fund to buy cryptocurrencies, preliminary coin offerings and associated business. Novogratz will set up $150 countless his own cash and prepares to raise $350 million more by January, generally from household workplaces, rich people and fellow hedge fund supervisors, stated an individual acquainted with his strategies.

At that size, the Galaxy Digital Assets Fund would be the most significant of its kind and signal a growing approval of cryptocurrencies such as bitcoin and ether as genuine financial investments. For Novogratz, 52, the fund marks a resurgence to expert finance after humbling losses at Fortress and nearly 2 years of self-imposed exile from Wall Street.

Novogratz, in an interview with Bloomberg Television, decreased to reject or validate that he &#x 2019; s raising a fund, mentioning regulative restrictions. He did talk at length about his current experience with digital possessions and why he &#x 2019; s excited to trade them.

&#x 201C; This is going to be the biggest bubble of our life times, &#x 201D; Novogratz stated. &#x 201C; Prices are getting method ahead of where they ought to be. You can make a lot of cash en route up, and we intend on it. &#x 201D;

&#x 2018; Trading Junkie &#x 2019;

Just this month, bitcoin struck a record of nearly $5,000 then plunged 30 percent in 2 weeks as purchasers weighed the effect of a Chinese restriction on preliminary coin offerings and domestic trading in virtual currencies.

&#x 201C; I cost $5,000 or $4,980, &#x 201D; he stated. &#x 201C; Then 3 weeks later on I &#x 2019; m shopping it in the low $3,000 s. It &#x 2019; s a lot of enjoyable if you &#x 2019; re excellent at that and you &#x 2019; re a trading addict. &#x 201D;

It began with a late-2015 see to a pal &#x 2019; s start-up in Brooklyn.

&#x 201C; I anticipated to see Joe, a canine and one assistant. Rather I saw 30 vibrant youths stuffed in a Bushwick storage facility, coding, talking on the phone, making prepare for this transformation, &#x 201D; Novogratz stated. &#x 201C; Macro men are instinctive. My impulse was, &#x 2018; I wish to purchase a piece of this business. &#x 201D; &#x 2019;

$250 Million Haul

He chose rather to purchase ether, the cryptocurrency token utilized on the Ethereum network. Novogratz purchased about $500,000 at less than a dollar per ether and left on a getaway to India. By the time he returned a couple of weeks later on, the cost had actually increased more than fivefold. He purchased more.

Over the course of 2016 and into 2017, as ether rose to practically $400 and bitcoin topped $2,500, Novogratz offered enough to make about $250 million, the most significant haul of any single sell his profession. He stated he paid tax on the earnings, purchased a Gulfstream G550 jet and contributed an equivalent total up to a humanitarian task for criminal justice reform.

Novogratz was connected. Today, he hosts a weekly &#x 201C; crypto meet-up &#x 201D; for as numerous as 90 individuals over beverages at his workplace in Manhattan &#x 2019; s SoHo district and waxes gushing about his embraced market.

&#x 201C; Remember, bubbles take place around things that basically alter the method we live, &#x 201D; he stated. &#x 201C; The railway bubble. Railways truly essentially altered the method we lived. The web bubble altered the method we live. When I look forward 5, 10 years, the possibilities truly get your animal spirits going. &#x 201D;

Novogratz, understood to his pals as &#x 201C; Novo, &#x 201D; price quotes that he now has about 20 percent of his net worth in digital properties. In addition to cryptocurrencies, his household workplace has actually bought bitcoin mining, trading platforms, preliminary coin offerings, pre-ICO sales and blockchain innovation. He stated Gemini , the exchange run by Cameron and Tyler Winkelvoss, is &#x 201C; among our go-to locations &#x 201D; in part due to the fact that it has a New York State license to trade bitcoin and ether.

With a $500 million hedge fund, Novogratz will have the ability to catch trading chances that need more scale, in addition to wield impact with business owners, designers and regulators. Naturally, he &#x 2019; ll likewise generate income on other individuals &#x 2019; s loan: The individual acquainted with his fund, who has actually seen early variations of marketing files, stated it will charge financiers a 2 percent management cost and 20 percent of earnings, with a two-year lockup.

Plus, he #x &doesn 2019; t like the concept of fading away.

&#x 201C; Everyone would like to leave Wall Street with dignity and few do, &#x 201D; Novogratz stated. &#x 201C; You get begun the knees or begun the belly, you gain from your errors, you type of restore and you begin your brand-new experience. &#x 201D;